Abstract
We studied the association of individual differences in objective financial knowledge (i.e. competence), subjective financial knowledge (i.e. confidence), numeric ability, and cognitive reflection on a broad set of financial behaviors and feelings towards financial matters. We used a large diverse sample (N = 2063) of the adult Swedish population. We found that both objective and subjective financial knowledge predicted frequent engagement in sound financial practices, while numeric ability and cognitive reflection could not be linked to the considered financial behaviors when controlling for other relevant cognitive abilities. In addition, both objective and subjective financial knowledge served as a buffer against financial anxiety, while we did not detect similar buffering effects of numeric ability and cognitive reflection. Subjective financial knowledge was found to be a stronger predictor of sound financial behavior and subjective wellbeing than objective financial knowledge. Women reported a lower level of subjective financial wellbeing even though they reported a more prudent financial behavior than men, when controlling for sociodemographics and cognitive abilities. Our findings help to understand heterogeneity in people’s propensity to engage in sound financial behaviors and have implications for important policy issues related to financial education.
Highlights
People regularly make unwise financial decisions: they buy things they can’t afford, they do not save enough for retirement, and they fail to pay their bills on time
In this study we explored how individual differences in objective financial knowledge and subjective financial knowledge, numeracy, and cognitive reflection were associated with sound financial behavior and subjective financial wellbeing
When comparing the unadjusted results, males consistently scored higher than females on all measured cognitive abilities, including objective and subjective financial knowledge, numeracy, and cognitive reflection
Summary
People regularly make unwise financial decisions: they buy things they can’t afford, they do not save enough for retirement, and they fail to pay their bills on time. Journal of Family and Economic Issues of individual differences that affect financial behaviors and subjective financial wellbeing is limited. This is surprising given that this knowledge is key when designing adequate interventions and educational programs aimed at improving financial behavior. Financial knowledge here refers to the stock of knowledge related to personal finance concepts and products. This can be assessed both objectively, by using knowledge-based questions, and subjectively, by asking people to rate their level of financial knowledge. The term, financial knowledge, is often used interchangeably with financial literacy. A person that has low skills may be able to compensate by using tools (e.g., a calculator or a computer) and thereby be able to navigate successfully in matters related to personal finance
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